Today, we’re discussing What is Fear and Greed index ? in Crypto.
The Fear and Greed Index, developed by CNN Money, is used to gauge whether investors are too bullish or bearish on the stock market. The index ranges from 0 (extreme fear) to 100 (extreme greed).
Understanding the Fear and Greed Index
In theory, the Fear and Greed Index acts as a barometer for whether the stock market is fairly priced by looking at the emotions of investors. It is seen as a contrarian index.
When investors are fearful, they sell stock holdings in their portfolio, driving down stock prices to the point where they may be below their intrinsic value. The opposite is true when investors are greedy. As such, for the Index, fear is seen as a buy indicator, and greed is seen as a sell indicator.
A fear and greed rating of:
⦁ 0 to 49 indicates fear
⦁ 50 indicates neutral
⦁ 51 to 100 indicates greed
The Fear and Greed Index is a tool used to gauge investor sentiment on the stock market.
The index is based on seven different factors – each factor is gauged from 0 to 100 and equally weighted to generate the index value.
It is seen as less of an investment research tool and more of a market-timing tool.
Now, let’s talk about the current scenario i.e. 29th June 2022:
Taking the Crypto Fear and Greed Index into consideration along with Bitcoin’s price, we find that when the Crypto Fear and Greed Index touched the green line in Figure 1 at around 10, the price of Bitcoin rose from its lowest level 5 times with details as follows.
⦁ Increase 1 +70%
⦁ Increase 2 +45%
⦁ Increase 3 +310%
⦁ Increase 4 +25%
⦁ Increase 5 +300%
Vice versa, if the Crypto Fear and Greed Index is approximately 90 (red line on Figure 1), Bitcoin price sees a decrease from its highest level twice with details as follows:
⦁ Decrease 1 -40%
⦁ Decrease 2 -45%
Looking at the test results, it seems that we can use the Crypto Fear and Greed Index as part of our crypto investment analysis.
However, we must not forget that the real purpose of indexing is to measure the sentiment of investors in the market. It is not used as a buy-sell signal. If, however, it is used as such, we users may well get lost in the market sentiment.
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